IIJ's Suzuki sticks by Crosswave

BillClifford

TOKYO (CBS.MW) -- Internet Initiative Japan, which pioneered the Net experience here in the early 1990s for many corporate and individual users, became the first Japanese company to bypass the local stock market and list directly on the Nasdaq market, in the summer of 1999.

Having survived the Net stock bubble's boom and bust, IIJ continues its metamorphosis from Internet service provider to a company that offers a broad range of network infrastructure management and services. CBS.MarketWatch.com spoke with IIJ president and CEO Koichi Suzuki about negotiating the paths to profitability for both IIJ
IIJI, +2.67%
and its broadband data affiliate, Crosswave Communications
CWCI
.

You've reached a milestone with positive operating income in IIJ's July-Sept. quarter. Do you think this will impress the market?

Before listing on Nasdaq, IIJ had operating profit. But over the last two years we've made some large investments and faced high international Internet backbone costs. These costs are coming down. The fact is, we beat our target for positive operating income in 2002 by about a year, and we expect this to continue in coming quarters. I think we can improve our fundamentals because we don't compete in the low-price ISP market. Our technology is two to three years ahead of our competitors'. The important thing is our customers appreciate the level of technology and service we provide. The market may not understand this.

Your net loss was nine times bigger than the year before and nearly twice the first quarter, much of that apparently as a result of equity losses on Crosswave. Some analysts say Crosswave acts as a ball and chain on IIJ's stock price. As president of that company, too, can't you set it free by spinning it off or selling it? Or taking it private, for that matter?

I never say such a thing. Crosswave is a separately managed company from IIJ. Its business fundamentals improve every quarter and its sales growth rate is very high. I believe in a few years or so, their scale of revenue and profit might even exceed IIJ's.

But Crosswave shares trade on the Nasdaq for less than a dollar and if this persists through January, could face delisting. It makes trouble for IIJ stock.

I believe that IIJ and Crosswave have sales and marketing synergies, and also benefit each other in technology research and development. You can see that in the growth of Crosswave's wide-area ethernet platform services, which is a big driver of revenues in its second quarter results. I believe market participants will come to a fair valuation of Crosswave. If an opportunity were to arise, IIJ would like to buy equity in Crosswave because we believe in their future.

Why don't you? You've got the cash ...

Well, we have to honor the relationship with Crosswave's other key shareholders, Sony
SNE, -0.99%
and Toyota
TM, -0.84%

So you can't increase your stake?

We don't expect to anytime soon.

IIJ prides itself on its blue-chip corporate customers. All in all you talk about 6,000 clients, but it really comes down to 40 major companies. But why don't we see new well-known companies brought into fold -- where are the new contract wins, and how fast can existing clients upgrade and absorb new services?

I think big Japanese companies and banks are just at the starting point, really. A couple of years ago the entities that have merged to become Sumitomo-Mitsui Banking were just starting to invest. Meanwhile in the U.S., firms like Goldman Sachs were already hooked up to use huge bandwidth. In Japan, the story has been very narrow band. In order to compete, Japanese companies have to introduce new networked systems.

But for so many banks, it's not a question of competing but of survival. Do they have the spare cash to pay for your high-end fiber-optic connections?

I understand the situation, but if the banks stop investing they can't survive. Companies that care about supply chain management can't afford to operate without an efficient network infrastructure. In October, we announced a tie-up with Japan Research Institute, a think-tank of Sumitomo-Mitsui, to provide broadband services to JRI customers.

And yet for your value-added services, revenues were up only 0.5 percent in the second quarter from the first.

The definition of value-added services is not so easy, but we are seeing good growth year-on-year from data-center and systems-integration revenues. System integrations sales increased 16 percent in the second quarter year-on year and 47 percent sequentially. A challenge remains to hire good engineers in Japan; we think ours are the best, but they're still hard to recruit. Next year the highest growth rate will probably come from data centers. One new data center outside Tokyo is being built near a facility of national public broadcaster NHK. When the law changes to allow NHK to broadcast content over the Internet, it'll be big business.

When will that happen?

It's unclear, but legislators and bureaucrats are getting discussions started. Now NHK is streaming educational programming, but they have a huge entertainment library that's untapped. An indirect way that we're preparing for this opportunity is through CDN Japan, a nonprofit group for broadband content distribution that IIJ set up with Oracle Japan
ORCL, -1.42%
Cisco's Japanese affiliate
CSCO, -4.02%
and others. This consortium started distributing broadband content programs -- there'll be 100 to 150 programs -- to about 250,000 home users in Japan on Tuesday.

Do you regret listing IIJ on Nasdaq?

It's been good in the sense of introducing us to good technology in the U.S. and to help us keep ahead in technology. And it has reinforced IIJ in the minds of many people, customers and. As for the future, we are exploring the possibility of listing in Tokyo -- nothing decided yet -- but perhaps someday.

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